NASD Board of Governors Approves Rule Proposal for Trading in Hot Equity Offerings; Eliminating Free-Riding and Withholding Rule
Nancy A. Condon
(202) 728-8379 (202) 728-8304
Washington, D.C.—The National Association of Securities Dealers, Inc. (NASD® ) Board of Governors today approved a new rule proposal on trading in hot equity offerings to replace the free-riding and withholding interpretation. The rule is designed to protect the integrity of the public offering process by ensuring that member firms make a bona fide public offering of securities at the public offering price and that none are withheld for the firm’s benefit or to reward individuals in the position to direct future business to the firm. The rule also seeks to ensure that industry "insiders" do not take advantage of their position to purchase hot issues for their own benefit at the expense of public customers.
The proposed new rule makes several significant changes including establishing a threshold premium for a "hot issue," limiting the application of the rule to equity offerings, eliminating the "conditionally restricted" status, and redefining the scope of persons who are covered by the rule.
The proposed rule defines a "hot issue" by establishing a threshold premium of five percent. If, within the first five minutes of trading, the volume weighted price of a public offering is five percent or more above the offering price, the offering is considered "hot." The current interpretation defines a hot issue as any security that trades "at a premium," whenever secondary market trading begins.
Equity offerings and offerings of securities with an equity component, such as a convertible security or a debt security bundled with a warrant, will be the only offerings covered by the new rule. Offerings of non-investment grade debt currently covered in the free-riding and withholding interpretation, will not be included the new rule.
Another significant change in the proposed rule is the elimination of the "conditionally restricted" status. As a result, more precise determinations will be made regarding individuals to whom the rule will apply. One area of focus is on preventing sales of hot issues to persons who are in a position to direct investments of other peoples’ money. Under the new rule, hedge fund managers, investment advisors, and other investment or portfolio managers would be barred from purchasing hot issues. However, individuals who participate in investment clubs or a family partnership would no longer be considered "conditionally restricted."
A number of changes incorporated in the new trading in hot equity offering rule are in response to comments received during a recent request by NASD Regulation for comment on rules that are in need of modernization or could be eliminated without adversely affecting investor protection. The rule will be submitted to the Securities and Exchange Commission for review and release for public comment.
The NASD is the largest securities-industry, self-regulatory organization in the United States and parent organization of NASD Regulation, Inc., The Nasdaq Stock Market® and the American Stock Exchange (Amex®). Through its regulatory subsidiary, the NASD develops rules and regulations, provides a dispute resolution forum, and conducts regulatory reviews of member activities for the protection and benefit of investors.